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Startups have been at the heart of venture capital (VC) funding for the past few years, and expectations were high at the start of 2020 but the entrepreneurial and investment ecosystem has not been spared by the coronavirus pandemic. In recent years, despite an environment of uncertainty and political-economic tension, great progress has been made in the venture capital space.
Startups in particularly hard-hit industries have found themselves at risk in these uncertain times as sales have softened and private fundraisings have proved more challenging. Founders had to look hard at their businesses, including their cash runways, forecasts, capex and assumptions, in order to weather the storm.
InnoVen Capital’s managing director and chief executive officer Ashish Sharma talked to Entrepreneur India and discussed how startups are being evaluated especially during the COVID-19 pandemic.
Near-Term Market Impact
The pandemic will directly or indirectly prolong to significantly affect business action levels and operations for startups for many months to come.
This will more than likely result in a decline in VC deal volume over the short to medium term, particularly for startups in the travel, ride sharing, workspace sharing, leisure and events sectors given the contraction in consumer activity and government responses to the pandemic. It has resulted in a pronounced uptick in activities in areas such as e-commerce, online entertainment and social media, online medical and health services, home working and education tools, and non-contact services such as robotics and artificial intelligence, particularly for supply chains and logistics.
“Because of the pandemic and consumer behavior, the demand and destruction has been very high and the recovery will take a long time,” Sharma noted.
While the consumer end-markets are severely impacted straight away by the pandemic, businesses selling into enterprises generally experienced less of an impact in first quarter (Q1) and early second quarter (Q2) due to longer sales cycles and existing customer engagements put in place pre-COVID. The impact on enterprise-focused companies will likely manifest in Q2 and Q3 as their customers rationalizes their own businesses.
“The penetration of venture debt in India is much lower than what would be found in the Valley,” he further said.
Funding Patterns Amid COVID-19
In normal times, investors take anywhere from three to nine months to close a deal. However, COVID-19 has presented an unprecedented challenge for VCs and there has been a sharp decline in deal flows in India.
There has been a newfound interest in funding startups in sectors such as edtech, fintech, healthtech, fast moving consumer goods (FMCG), mobility and home entertainment.
“In terms of innovation, when it comes to AI (artificial intelligence), machine learning and autonomous driving, they are far ahead. In terms of scale, how quickly companies can able to go from X to ten thousand X,” Sharma added.
New World, New Approach/Turning To Tech
All things considered, the investor community views the pandemic as an opportunity to identify new trends and strengthen the financial system to move beyond the crisis.
The tech industry is apt to persevere and even thrive during economic downturns. For this sole reason, VC funds are turning their focus toward technology and R&D (research and development), particularly those businesses designing products and services with a social impact. Firms are setting up new funds dedicated to those high-potential startups with a focus on effective fixes to the pandemic.
“A lot of companies have been able to go public, both in government state and private market. IT (information technology) in India is doing great progress and product companies in India already have great potential to go big. The time has come that some of the larger companies should go public and they can go bigger when in public domain to get best price discovery and control one’s own destiny and not solely depend on funding,” he stated.
Industry watchers believe the post-COVID-19 world will be led by ‘trends’ that will see specific sectors becoming beneficiaries of venture capital funds. Investors will continue to fund edtech and healthtech startups as they believe these sectors have the potential to sustain even after the dust has settled.
The novel coronavirus has forced VC funding to reboot and study the macroeconomic environment before backing new startups. Also, the post-pandemic period will be the time when investors will reassess how they reach valuation estimates and how the money will be invested in high-risk startups.
Some firms are going far enough to emphasize precise trends that will continue to grow in a post-COVID world. Investors, corporates, governments and other stakeholders are funding such startups that will make a positive difference to the innovation ecosystem in the long run. It is a welcome development at a time when investors have stalled funding or are exiting deals.